Vetri Subramaniam, CIO, Religare Invesco Mutual Fund believes that going ahead, the market is likely to focus on economic growth pick-up in medium to long-term.
Though politics has taken central stage among investors and traders, in the past two months the market has not made any great moves and politics is a more of 'noise factor' than a trigger for the market, believes Vetri Subramaniam, CIO, Religare Invesco Mutual Fund. Going ahead, the market is likely to focus on economic growth pick-up in medium to long-term, he told CNBC-TV18 in an interview.
Market valuations are now at reasonable levels and Subramaniam finds these levels attractive for building portfolios. Religare Invesco MF has been accumulating cyclicals over the last one year and has limited exposure to asset owner companies in the infrastructure space.
Meanwhile, the next key trigger for the market is the US jobs data report and based on that, US Federal Reserve’s decision on its ongoing monetary stimulus plan. Subramaniam feels that the Indian market is now better prepared to tackle taper terror now than it was in May.
However, he cautions that the market could be at risk if US destabilises post QE taper.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: For the markets, how are they poised? We saw that big rally, have they already factored in completely the positive good news if they get a change of government that they want or do you think this market can still see a lot of gains based on this news in the next six months?
A: There has been a lot of talk about politics in the last few days in particular but just keep in mind that actually the market - if you look at the Sensex, it is only trading above 300 points higher than where it was when the first whiff came in of the Fed delaying tapering, which was somewhere late in September.
So in that sense it is not very clear to me that all those noise and drama going on about politics is necessarily all that relevant. This seems to have been something which has caught the fascination of a lot of market players locally in the past week or two.
However, the markets have not moved much over the last two months. There is a lot of noise and drama about politics and it is nice to talk about.
However, in medium-term to longer-term what the market will need to focus on is obviously the extent to which we see economic growth start to pick up; signs of that are as yet weak. Also, to what extent we can start to see some sort of a pick up in overall growth rates. So that remains the key.
Q: Would you then say the market is actually vulnerable that in spite of getting decent flows and a perception of positive political news the market has not gone up and therefore when actual tapering happens this market is vulnerable?
A: Markets will definitely be vulnerable if we don’t see earnings growth at some point start to accelerate. The good thing is that from a valuation perspective, it is not that we are trading at nose-bleed valuations but just in line with historical valuations, average valuations on a trailing basis.
However, for the market to make significant progress from here we need earnings growth to recover. In 2012 and 2013, we had single-digit earnings growth and 2014 also appears to be another year of single-digit earnings growth. So markets really need some kind of momentum to come back and they require earnings growth of corporate India to start to improve.
The key to revival of earnings growth eventually will be - we have seen some correction of the current account deficit; we also need to see further correction of the fiscal deficit and interest rates to trend lower and the investment cycle start to kick in again.
Most of this requires passage of time and a government which can possibly take from bold policy decisions and maybe accelerate this process but it is a time consuming process not something which can be done overnight.
Q: Investors have gotten a bit excited in the last couple of weeks because of broad based participation that has started to creep into the markets, you are now seeing some of the cyclical sectors, capital goods, some metals, some banks, beaten down banks etc, even if it is tactical would you use this as an opportunity to get into any of these sectors?
A: Since you have raised that point, the irony of the situation is that for the better part of the last two years, if you look at the Indian markets, we have been trading at valuations somewhere between our long-term trailing average valuations and maybe 10-15 percent lower. So, instead of using all those opportunities when valuations were significantly lower to get into the market, people have ignored the market for the longest time and in reality it has only been the foreigners who are largely stayed net buyers over the last two years.
In the last week or two suddenly local investors who had stayed away from this market for two years and who had ignored valuations when the valuations were reasonable are suddenly getting very excited when valuations have come back to near the top-end of the last two years of range. Sure the valuations can move higher but I just find it very ironical that having ignored cheap valuations for two years, people are getting excited about it now.
We are very glad that some of the cyclicals have done well because we have been looking at some of these cyclical companies on our portfolios. I think pretty much over the last twelve months, we have been accumulating some of them. It was very painful in the middle part of the year when some of these stocks were continuing to get sold off and the market was frantically moving towards so called non-cyclical businesses.
So it was a painful period but we are very glad to see that some of these companies are rebounded from there but truth be told, none of these companies are as yet telling us that they are seeing any kind of change in momentum in terms of business trajectory at this point of time.
I am very happy that the cyclicals have moved, the valuations had gone down to very attractive levels but I am not sure that you will see a very sustainable move on these companies in the near-term because their business fundamentals remain a bit challenged and that will be something that we will have to deal with.
Q: As a fund manager would your position be that you will not go out buy too much at current levels – do you get a sense that you are going to get more attractive levels – so at current levels if you got money would you put that extra in cash?
A: That depends on each fund mandate. We have got lot of funds which have fully invested approach, so we don’t take cash calls on those portfolios.
Our strategy for the better part of last 2-3 years has been to focus more on stock picking and not focus too much on macro because while we knew macro was difficult, we sensed that it was already discounted and lot of people were already aware of the macro and that was reflected in the relative pricing equations in terms of valuations that you could see in the market. So our approach continues to be driven more by stock picking and we have no clear at this point or understanding of what may happen in politics, who the new government may be and what their policies might be and at which point the economy might actually start to do better.
However, from a stock picking perspective our approach is very clear we don’t want to back those businesses which have more balance sheet pain, companies which can continue to manage in this challenging environment even if the environment lasts for slightly longer because as and when it improves these are the companies that are best placed to benefit from an improvement in the economy. So we are happy backing those companies but there is very little visibility on what and when it might change.
Q: If I am a stock picker at this point in time, a long duration investor and I want to churn my portfolio a little bit, what should the best approach be, both sector wise and stock wise?
A: Our approach has been that there are phases in the market where stock picking is more important, there are phases when the sector selection is more important. We still think we are in an environment where the stock picking is more important than sector allocation.
However, if I were to make the two-three opportunities which are clearly visible, I think there is one opportunity visible in the sense that cyclical companies are trading at a big discount to their historical valuations. As long as there is no balance sheet risk in those companies, we are quite happy to invest over there.
The second opportunity is that a lot of the midcaps and smallcaps are trading at a reasonable discount to the largecap, I would not say it is a crisis level of discount but there is a reasonable discount that gives us a little bit of margin and safety to go and invest in those companies. So those are two sort of clear opportunities that we continue to see and we are trying to benefit from.
The other theme is that to the extent the rupee has moved down over the course of the last year or so, we are seeing a lot more optimism. In fact the only part of corporate India where we see a lot of optimism is in companies, which are in the export arena, who are clearly saying that this movement in the currency has given them an ability to go out and either invests in new business, or to compete on price and gain market share. So companies, which are strong, credible exporters, are clearly beneficiaries of this environment and that is again something that we are positive about.
Q: Will you stay with that for the next six months, since you are saying that you don’t have clarity of the period behind, none of us have, would this be the theme?
A: Yes, the theme that we have taken very clearly is to back the companies at this point of time rather than focusing on the macro because the simple answer about the macro is that we don’t know and the simple answer about politics is that nobody knows.
Q: So until then your ‘stay invested’ stocks would be the ones that are exposed to global markets that are export oriented is that what you are saying?
A: No, we are happy to buy cyclical businesses if we think the valuations are cheap and we have been doing that and we are quite happy with the way some of those companies are moved up over the last quarter. But it was a very painful period as I said in the early part of the year when they were still getting crushed. So we are happy to buy cyclical businesses at cheap valuations. If one takes a longer-term perspective then at some point we do think the economy will be able to get back to a slightly better growth trajectory and it is these cheap cyclical businesses where we can hope to see both earnings growth and also see the benefit of a P/E multiple change come through.
So, if you look at it from a more medium-term to longer-term perspective, you need to back some of these cyclical businesses. The key thing is to make sure that you are in cyclical businesses, which make it to the start line. If they have damaged balance sheets, they will not get to the start line when this economy starts to revive and that is important.